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Owner’s draw vs. salary
An owner payment needs a purpose as well as a bank entry. The business’s tax classification and the owner’s work determine which questions belong with payroll and which belong with the CPA reviewing equity and distributions.
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General information, not legal or tax advice.
Start with the entity’s tax classification
The IRS generally treats a domestic LLC with at least two members as a partnership and a single-member LLC as disregarded from its owner unless it elects otherwise. The letters LLC alone do not settle how an owner should be paid. Keep the entity elections with your accountant’s setup instructions.
Sources: IRS Limited liability company (LLC)
Distinguish partners from corporate officers
IRS guidance states that partners are not employees and should not receive a W-2. A corporate officer is generally an employee. Confirm the applicable treatment before adding an owner to payroll or categorizing a transfer as a distribution.
Sources: IRS Paying yourself
Review compensation for S corporation services
Payments and distributions to an S corporation officer must be treated as wages to the extent they represent reasonable compensation for services. The IRS can reclassify non-wage distributions as wages. This calls for a review of the actual work performed, not a standard percentage selected from an online example.
Sources: IRS S corporation compensation and medical insurance issues
Give the CPA evidence for the salary decision
The IRS lists duties, experience, time devoted to the business and compensation at comparable businesses among reasonable-compensation factors. Prepare a description of the owner’s responsibilities and work pattern for the CPA. Save the resulting instructions alongside the payroll setup.
Sources: IRS S corporation compensation and medical insurance issues
Keep personal withdrawals identifiable
As a bookkeeping practice, separate owner withdrawals from ordinary operating costs and document their purpose. IRS Publication 583 discusses checks payable to yourself for personal withdrawals. Reconcile transfers between business and personal accounts so an unexplained movement does not become a duplicate expense.
Sources: IRS Publication 583, Starting a Business and Keeping Records
Sources: owner payment records
Keep owner activity clear in the books
Tidwell organizes owner transactions and payroll records while your CPA determines entity treatment and compensation guidance.